T-777-87
Labrador Offshore Shipping Company Limited
(Plaintiff)
v.
Her Majesty the Queen (Defendant)
INDEXED AS: LABRADOR OFFSHORE SHIPPING CO. V. CANADA
(T.D.)
Trial Division, Martin J.—Halifax, December 13,
1989; Ottawa, January 11, 1990.
Income tax — Income calculation — Investment Tax Credit
— Meaning of property acquired "primarily for use in .. .
Nova Scotia" in Income Tax Act, s. 127(9)(a.1) — Plaintiff
acquiring diving support vessel which leased to Petro-Canada
— Lease executed in Nova Scotia — Operated offshore East
ern Canada — Agreed vessel not used for exploration or
drilling in Nova Scotia — S. 127(9)(a.1) contemplating physi
cal use — Lease not constituting use by owner — Vessel used
by lessee — Purpose of legislation.
This was an appeal from the Minister's determination of the
plaintiff's refundable investment tax credit with respect to its
diving support vessel designed for offshore oil and gas drilling
and exploration. The definition of investment tax credit in
Income Tax Act, paragraph 127(9)(a.1) requires the acquisi
tion of a qualified property "primarily for use in ... Nova
Scotia". The plaintiff chartered the vessel to Petro-Canada for
four years as soon as it was built. Except for a few months
when it operated offshore East Africa, the vessel operated on
the Eastern Canadian offshore until December 1986. The vessel
was crewed by Maritimers and repairs were done in the Atlan-
tic provinces. It was agreed that the vessel constituted "quali-
fied property" within the meaning of paragraphs 127(10)(b)
and (d), which requires a reasonable expectation that the vessel
will be used "in Canada", and that the vessel had not been used
in Nova Scotia. The plaintiff submitted that the act of leasing
the vessel to Petro-Canada, which lease was executed in Nova
Scotia, constituted the plaintiff's use of the vessel in Nova
Scotia. The issue was whether the plaintiff acquired the vessel
for use primarily in Nova Scotia, within the meaning of para
graph 127(9)(a.1). The plaintiff submitted that there are two
possible meanings to the investment tax credit provisions and
that the meaning most favourable to it should be applied.
Held, the appeal should be dismissed.
The fatal weakness in the plaintiffs argument was that it
was based on the assumption that the phrase "acquired a
qualified property primarily for use in ... Nova Scotia" is
unclear. The use contemplated by paragraph 127(9)(a.1) is the
physical use of the property. It does not include the leasing of
the vessel by the plaintiff. A lease of a property or a vessel is
granting the use of the property to the lessee. By leasing the
property the owner parts with the use of the property. It was
not the lessor, but the lessee who used the vessel. The purpose
of the investment tax credit legislation was to confer benefits on
regions of slow economic recovery and high unemployment.
Because the use of the vessel did not take place in Nova Scotia,
or in any of the other areas named in paragraph 127(9)(a.1),
the plaintiff was not entitled to the benefits of that paragraph.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 127(9)(a.1)
(as am. by S.C. 1977-78, c. 1, s. 61), (10) (as am. by
S.C. 1974-75-76, c. 71, s. 9; 1977-78, 'c. 1, s. 61;
1980-81-82-83, c. 48, s. 73; c. 140, s. 89), 165 (as am.
by S.C. 1984, c. 45, s. 68; 1988, c. 61, s. 14), 255 (as
am. by S.C. 1980-81-82-83, c. 48, s. 111).
CASES JUDICIALLY CONSIDERED
DISTINGUISHED:
Funtronix Amusements Ltd. v. M.N.R., [1989] 2 C.T.C.
2296; (1989), 89 DTC 545 (T.C.C.).
CONSIDERED:
Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R.
536; [1984] CTC 294; (1984), 84 DTC 6305; 53 N.R.
241.
REFERRED TO:
Johns-Manville Canada Inc. v. The Queen, [1985] 2
S.C.R. 46; (1985), 21 D.L.R. (4th) 210; [1985] 2 CTC
111; 85 DTC 5373; 60 N.R. 244; Mother's Pizza Parlour
(London) Limited v. The Queen, [1985] 2 F.C. 403;
[1985] 1 CTC 361; (1985), 85 DTC 5271 (T.D.).
COUNSEL:
W. Wylie Spicer and Dug Richardson for
plaintiff.
Robert W. McMechan and Michael J. Butler
for defendant.
SOLICITORS:
McInnes Cooper & Robertson, Halifax, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
MARTIN J.: The plaintiff appeals, with the con
sent of the Minister of National Revenue, by way
of notice of objection pursuant to section 165 of
the Income Tax Act [S.C. 1970-71-72, c. 63 (as
am. by S.C. 1984, c. 45, s. 68; 1988, c. 61, s. 14)],
the Minister's determination of the plaintiff's
refundable investment tax credit with respect to its
diving support vessel Balder Challenger. The
plaintiff says that the amount of the investment
tax credit (ITC) should be 20% of the $22,022,711
cost of the vessel or $4,404,542 while the defen
dant says that it should be 7% of the cost of the
vessel or $1,541,590.
Because the parties were able to file an agreed
statement of facts the evidence adduced at the trial
was minimal and, in the result, there remained a
single issue to be determined by me. The issue to
be decided is whether, within the meaning of
paragraph 127(9)(a.1) [as am. by S.C. 1977-78, c.
1, s. 61] of the Act, the plaintiff acquired the
vessel for use primarily in Nova Scotia. The rele
vant portion of subsection 127(9) provides as
follows:
127.(9)...
(a.l) where, after March 31, 1977, the taxpayer has
acquired a qualified property primarily for use in, or made a
qualified expenditure in respect of scientific research to be
carried out, in the Province of Newfoundland, Prince Edward
Island, Nova Scotia or New Brunswick or in the Gaspé Penin
sula, an amount equal to 5% of the aggregate of all amounts
each of which is the capital cost to him of that qualified
property acquired by him in the year or the amount of that
qualified expenditure made by him in the year, determined
without reference to subsection 13(7.1),
The quoted paragraph uses the phrase "quali-
fied property" which has a specifically defined
meaning for the purposes of subsection 127(9)
which meaning is set out in subsection 127(10) [as
am. by S.C. 1974-75-76, c. 71, s. 9; 1977-78, c. 1,
s. 61; 1980-81-82-83, c. 48, s. 73; c. 140, s. 89] the
relevant portion of which, for the purposes of this
matter, is as follows:
127. (10) For the purposes of subsection (9), a "qualified
property" of a taxpayer means a property (other than a certi
fied property) that is
(a) a prescribed building to the extent that it is acquired by
the taxpayer after June 23, 1975, or
(b) prescribed machinery and equipment acquired by the
taxpayer after June 23, 1975,
that has not been used, or acquired for use or lease, for any
purpose whatever before it was acquired by the taxpayer and
that is
(c) to be used by him in Canada primarily for the purpose of
(i) manufacturing or processing of goods for sale or lease,
(ii) operating an oil or gas well or processing heavy crude
oil recovered from a natural reservoir in Canada to a stage
that is not beyond the crude oil stage or its equivalent,
(iii) extracting minerals from a mineral resource,
(iv) processing, to the prime metal stage or its equivalent,
ore (other than iron ore) from a mineral resource,
(iv.1) processing, to the pellet stage or its equivalent, iron
ore from a mineral resource,
(v) exploring or drilling for petroleum or natural gas,
(vi) prospecting or exploring for or developing a mineral
resource,
(vii) logging,
(viii) farming or fishing,
(ix) the storing of grain, or
(x) producing industrial minerals, or
(d) to be leased by the taxpayer, to a lessee (other than a
person exempt from tax under section 149) who can reason
ably be expected to use the property in Canada primarily for
any of the purposes referred to in subparagraphs (c)(i) to
(x), .. .
As the agreed statement of facts relates almost
exclusively to the quoted portions of section 127, I
will set it out in full:
The parties hereto, by their respective solicitors, admit the
facts hereinafter set out. These admissions are made for the
purpose of this proceeding only and may not be used against
either party on any other occasion. The parties may adduce
further and other evidence relevant to the issue not inconsistent
with this agreement:
1. At all material times, the "Balder Challenger" constituted
"qualified property" within the meaning of paragraphs
127(10)(b) and (d) of the Income Tax Act through its use by
Petro-Canada primarily for the purpose of exploring or drilling
for petroleum or natural gas.
2. At all material times, the "Balder Challenger" was not used
for the purpose of exploring or drilling for petroleum or natural
gas in the Province of Newfoundland, Prince Edward Island,
Nova Scotia, or New Brunswick or in the Gaspé Peninsula.
3. At all material times, the Plaintiff expected the "Balder
Challenger" to be used in Canada by Petro-Canada for the
purpose of exploring or drilling for petroleum or natural gas,
but not to be used for this purpose in the Province of New-
foundland, Prince Edward Island, Nova Scotia, or New Bruns-
wick or in the Gaspé Peninsula.
The evidence which the plaintiff introduced, in
addition to the agreed statement of facts, consisted
basically of a brief history of the vessel including
its acquisition by the plaintiff, its lease by way of
charter to Petro-Canada Inc. (Petro-Canada), its
management and operation by a company
associated with the plaintiff and its eventual dispo
sition. I will briefly summarize the evidence.
The vessel, some 226 feet in length and having a
gross tonnage of 2508.73 tons, was build by
Marystown Shipyards Limited of Marystown,
Newfoundland, as a specially designed diving sup
port vessel for offshore oil and gas drilling and
exploration. It had originally been commissioned
by Petro-Canada but prior to its completion that
company transferred its interest in the vessel to the
plaintiff. The vessel was registered in the name of
the plaintiff at the Port of Halifax registry on
August 19, 1983 having been acquired from the
shipyard at a total cost of $22,022,711.
It was a part of the arrangement between Petro-
Canada and the plaintiff that upon acquiring the
oil company's interest in the vessel and upon deliv
ery of the complete vessel from the shipyard to the
plaintiff that the plaintiff would charter the vessel
to the oil company for a term of four years.
Accordingly, on August 19, 1983, the plaintiff
entered into a charter agreement with Petro-
Canada for a four-year term terminable upon cer
tain conditions one of which was that the oil
company ceased to be an exploration operator in
the Eastern Canadian offshore.
The vessel went into service offshore Labrador
immediately following its charter to Petro-Canada
and continued in that area and other areas off
shore Newfoundland and Nova Scotia until
November, 1983. From November 5, 1983 to June
4, 1984 the vessel operated offshore East Africa
following which it returned to again operate on the
Eastern Canadian offshore. On December 24,
1986, with approximately six months of its four
year charter remaining, Petro-Canada terminated
the charter following which the vessel operated on
short-term and spot charters until the plaintiff sold
it to Norwegian interests in 1988.
Considerable emphasis was placed upon the fact
that the vessel was crewed by Nova Scotians and
Newfoundlanders of whom two were Inuits from
Labrador. Counsel for the plaintiff also had evi
dence to show that the costs of repairs, mainte
nance and provisioning the vessel were almost
exclusively incurred in the Atlantic provinces. I
accept the fact that the construction, operation,
repair and maintenance and provisioning of the
Balder Challenger was of considerable economic
benefit to the Atlantic provinces region.
The principal moving force behind the plaintiff
is H.I. Mathers & Son Ltd., an old Nova Scotian
company which first became involved in offshore
oil and gas exploration in 1981. It caused the
plaintiff, another Nova Scotian company, to be
incorporated in 1983 for the sole purpose of
owning and chartering the Balder Challenger. The
issued share capital of the plaintiff was owned 70%
by Balder Offshore Canada Inc., 20% by Scotia
Energy and 10% by the Labrador Inuit Develop
ment Corporation. Balder Offshore Canada Inc.
was in turn 100% owned by H.I. Mathers & Son
Ltd.
The plaintiff company had no employees and no
office space. Its registered office was in Halifax
and the majority of its Board of Directors and all
of its officers were from Nova Scotia. Once the
plaintiff had chartered the vessel to Petro-Canada
it turned over the management of the charter
agreement to Balder Offshore Canada Inc. Under
this arrangement that latter company, for a fee,
operated the vessel for the use of Petro-Canada
and was reimbursed by the plaintiff for all
expenses which it incurred in so doing. The reve
nues from the oil company under the terms of the
charter, approximately $20,000 a day, were paid
to the plaintiff.
In the agreed statement of facts the parties state
that the vessel constituted "qualified property"
within the meaning of paragraphs 127(10)(b) and
(d) of the Income Tax Act, that is to say it was
prescribed machinery and equipment leased by the
plaintiff to Petro-Canada which could reasonably
have been expected to use the vessel primarily in
Canada for exploring or drilling for petroleum or
natural gas. In order to constitute the vessel as
qualified property within the meaning of para
graphs 127(10)(b) and (d) the owner must estab
lish the reasonable expectation that the vessel will
be used for the purpose named "in Canada".
For the purposes of the Income Tax Act, "Cana-
da" is described in section 255 [as am. by S.C.
1980-81-82-83, c. 48, s. 111] in the following
terms:
255. For the purposes of this Act, "Canada" is hereby
declared to include and to have always included
(a) the sea bed and subsoil of the submarine areas adjacent
to the coasts of Canada in respect of which the Government
of Canada or of a province grants a right, licence or privilege
to explore for, drill for or take any minerals, petroleum,
natural gas or any related hydrocarbons; and
(b) the seas and airspace above the submarine areas referred
to in paragraph (a) in respect of any activities carried on in
connection with the exploration for or exploitation of the
minerals, petroleum, natural gas or hydrocarbons referred to
in that paragraph.
Thus it was because of the vessel's use by Petro-
Canada in its exploring and drilling operations in
the sea bed areas off the coasts and outside of the
provinces of Newfoundland and Nova Scotia,
licences for which had been issued by the Govern
ment of Canada, that the vessel was used "in
Canada" within the meaning of paragraphs
127(10)(b) and (d).
Being "qualified property" of itself does not
bring the vessel within the terms of paragraph
127(9)(a.1). In order to come within the meaning
of that paragraph the vessel must have been
acquired for use, not in Canada, but in one of the
provinces or the region named, that is to say within
the geographical areas comprising those provinces
or that region. In this respect paragraph no. 2 of
the agreed statement of facts states that the vessel
was not used in the province of Newfoundland,
Prince Edward Island, Nova Scotia or New Bruns-
wick or in the Gaspé Peninsula. Not only was the
vessel not used in these provinces or region but it
was not acquired for Petro-Canada's use in any of
those areas. It was acquired for Petro-Canada's
use offshore as opposed to its use in any of the
named provinces.
The plaintiff does not seek to bring itself within
the terms of paragraph 127(9)(a.1) through Petro-
Canada's use of the vessel. Petro-Canada's use of
the vessel on the Eastern Canadian offshore (in
Canada) is the basis on which the parties agreed
that the vessel is constituted qualified property
within the meaning of subsection 127(10).
What the plaintiff submits is that the plaintiff
acquired the vessel for its, as opposed to Petro-
Canada's use, that it acquired the vessel for its use
in Nova Scotia, and that the act of leasing the
vessel to Petro-Canada, which lease was executed
in Nova Scotia, constituted the plaintiff's use of
the vessel in Nova Scotia. As the entire act of
executing the lease took place in Nova Scotia the
plaintiff says that its use of the vessel was primari
ly in Nova Scotia.
In support of this position counsel for the plain
tiff cites the well-known quote of Estey J. in
Stubart Investments Ltd. v. The Queen, [1984] 1
S.C.R. 536; [1984] CTC 294; (1984), 84 DTC
6305; 53 N.R. 241 at pages 575-579 S.C.R., to the
effect that there should be a broader interpretation
of the Income Tax Act so as to permit conduct of
the taxpayer which falls within the spirit and
object of the Act and which is not designed to
defeat the expressed intention of Parliament.
Counsel also cited excerpts from budget
speeches to show that the ITC legislation was
introduced as an incentive for investment in ma
chinery and equipment used in the production of
petroleum, which legislation was intended to
create employment, foster regional growth and
help venture enterprises. When the rate of the ITC
was increased in 1978 to the 20% rate which the
plaintiff now seeks to have applied, the then Minis-
ter of Finance said it was for the purpose of giving
increased support to regional development.
Counsel then went on to say that because the
ITC provisions of the Act are not clear, and
because there are two possible meanings, I should
apply the meaning most favourable to the plaintiff
(Johns-Manville Canada Inc. v. The Queen,
[1985] 2 S.C.R. 46; (1985), 21 D.L.R. (4th) 210;
[1985] 2 CTC 111; 85 DTC 5373; 60 N.R. 244 at
pages 66-68 S.C.R., and Mother's Pizza Parlour
(London) Limited v. The Queen, [1985] 2 F.C.
403; [1985] 1 CTC 361; (1985), 85 DTC 5271
(T.D.), at pages 413-414 F.C.).
Counsel concluded that the acquisition and leas
ing of the Balder Challenger created the type of
regional activity for which the ITC legislation was
introduced and, given a broad interpretation of the
Act to encourage the activity sought to be
encouraged by Parliament, there was no reason
why paragraph 127(9)(a.1) could not be interpret
ed so as to find that the leasing of the vessel to
Petro-Canada in Halifax constituted a use of the
vessel primarily in Nova Scotia.
The argument put forth by counsel is almost
convincing. The fatal weakness in it, in my view, is
that to accept it in this matter would require me to
find that the phrase "property acquired primarily
for use in Nova Scotia" is unclear and capable of
two meanings one of which would include the
leasing of the vessel to Petro-Canada.
I note the observation of Rouleau J. in Mother's
Pizza Parlour (supra) that subsection 127(10) is a
provision whose meaning is less than clear. How
ever in this matter there is no difficulty with
subsection 127(10). The parties have agreed that
the vessel is "qualified property" within the mean
ing of that subsection. What has to be interpreted
in this action is the meaning of the phrase "proper-
ty acquired primarily for use in Nova Scotia".
In my view the use contemplated under the
provisions of paragraph 127(9)(a.1) does not
include the leasing of the vessel by the plaintiff. A
lease of a property or a vessel is granting the use of
the property, usually the exclusive use of the prop
erty, to the lessee. By the act of leasing the owner
or lessor parts with the use or the right to use the
property or equipment under consideration. It is
true, but imprecise, for a lessor to say that he used
his vessel to earn rent when he leases it. In fact, in
such circumstances, it is not the lessor who uses
the vessel but it is the lessee who uses it for his
own purposes. The lessor gives the right to use the
vessel to the lessee in consideration for the rent to
be paid to the lessor by the lessee.
This is but the same principle followed in the
imposition of municipal business taxes based on
the assessed value of property used in the taxpay
er's business. The landlord carries on the business
of leasing property and, in a loose sense, uses the
property in carrying on his business. However, at
least in the jurisdiction with which I am familiar,
the landlord's business tax is not based upon the
assessed value of the property which he leases
because, in the accurate legal sense, that property
is used by the tenant and not the landlord and it is
the tenant, if he carries on a business using that
property, who will be liable for the business tax.
Counsel was able to find one case in which a
court found that a lessor was using property even
though it was leased. In Funtronix Amusements
Ltd. v. M.N.R., [1989] 2 C.T.C. 2296; (1989), 89
DTC 545, Garon T.C.J. of the Tax Court of
Canada found the taxpayer owner of electronic
video games, which had been placed in amusement
arcades owned by others and played and operated
by persons patronizing the arcades, to be using the
machines to gain income. Revenue Canada had
argued that the individual patrons who played the
machines from time to time were the users of
them.
Garon T.C.J. concluded his observations with
these remarks [at page 2298 C.T.C.]:
According to the language of the Act s in a lease context, the
lessor is using the property for the purpose of gaining income
therefrom although during the term of the lease the day-to-day
enjoyment of the property is that of the lessee. Likewise, the
same leasehold premises may also be "used" in certain circum-
stances by the lessee for the purpose of gaining income
therefrom.
In support of his conclusion the judge referred
to sections 13 and 45 of the Income Tax Act which
sections establish particular rules for the computa
tion of income for the purposes of that particular
division of the Act. They do not apply to para
graph 127(9)(a.1).
As well the facts in Funtronix were substantially
different from those in the present case. In that
case there had been no lease of the equipment to
anyone. The owner taxpayer maintained complete
control over the equipment. The players or tempo
rary users of the equipment had a bare licence to
use them for a few moments in payment of a
deposited coin. The judge seemed to recognize this
when he followed the above-quoted conclusion
with the following observations [at pages 2298-
2299 C.T.C.]:
The matter could also be looked at from another angle. In
effect, the evidence clearly showed that the appellant was the
user of the property in the sense that it had access to such
equipment at all times and could alter the computer programs
stored in such equipment. In fact, it has been established that
these video games depreciate very quickly and in order to earn
revenue from such games, there was a requirement for the
appellant to change or alter the computer programs from time
to time. It is not disputed that the appellant could alter the
computer programs by simply changing what is referred to as
the EPROM unit (the acronym EPROM stands for erasable
programmable read only memory). This was certainly in my
view, an important use of the equipment by its owner.
I therefore conclude that the appellant was within the pur
view of paragraph (b) of the definition of "general-purpose
electronic data processing equipment" set out in subsection
1104(2) of the Income Tax Regulations a "user" of the subject
equipment.
I do not find that the Funtronix decision is
authority for the proposition that the use contem
plated by paragraph 127(9)(a.1) is or could be the
leasing of the vessel to Petro-Canada. In my opin
ion the use contemplated by paragraph
127(9)(a.1) is the physical use of the property, in
this case the vessel Balder Challenger. Because the
use of the vessel did not take place in Nova Scotia,
or in any of the other areas named in paragraph
127(9)(a.1), the plaintiff is not entitled to avail
itself of the benefits of that paragraph.
By its ITC legislation Parliament intended to
confer benefits on regions of slow economic recov-
ery and high unemployment. By paragraph
127(9)(a.1) Parliament designated the provinces
and region named therein as the geographical
areas which would be entitled to the highest rate of
benefit by allowing the ITCs on qualified property
used in those provinces and that region. The fact
that a vessel which was not primarily used in any
of those provinces or that region would have quali
fied for the increased benefit if it had been so used
is not sufficient to stretch the plain meaning of the
words of paragraph 127(9)(a.1) to find that the
leasing of the Balder Challenger to Petro-Canada
for its use outside of the areas referred to in that
paragraph constitute a use of the vessel in any one
of those areas.
For the reasons given the plaintiff's claim will be
dismissed with costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.